Gold Saving Schemes: An unusual way of investing in Gold

While addressing the nation through Man Ki Baat on 25th Oct. 2015, the Prime Minister, Mr. Narendra Modi announced launching the gold monetization and sovereign gold bond scheme on the auspicious occasion of Dhanteras. 

The objective of launching the two schemes is to lure Indians away from buying physical gold which remains passive and serves no economic purpose. As estimated, about 22,000 tonnes of gold (which when converted to currency will be precisely around Rs. 60 lakh crores), are held by households and institutions. In a country like India, where liquidity is the key to drive economic growth, money worth of Rs. 60 lakh crores remaining idle, does not augur well. Besides, in spite of having such big gold holdings, our appetite for the yellow metal has been on rise. This not only makes India the biggest consumer but also the biggest importer of gold in the world affecting our Balance of Payments adversely. Gold and crude oil import comprises of 65% of the total import bills, which has been the main reason behind rising current account deficit. Gold monetization and Gold sovereign bond schemes will be of great help to the country’s economy. 

Gold monetization can be one of the lucrative investment options. It is all about fixed deposit scheme for gold, earning interest. The minimum gold accepted under this scheme is about 30 gms (of 995 fineness) and there is no upper limit for the same. The designated banks will accept gold deposits under short-term (one to three years) bank deposit as well as medium (five to seven years) and long-term government deposit schemes (12 to 15 years). Short-term and medium-term deposits are taken in the name of the banks and long term deposits are taken in the name of the government. There will be a provision for pre-mature withdrawal, subject to a minimum lock-in period and penalty which will be determined by individual banks. Customers can deposit their jewellery, bullions and bars with the bank. Quality assayers will check the quality of gold and on confirmation will inform the bank the value to be credited to the customers gold deposit account. Bank on its part can melt the gold and convert into bars and lend the same to jewellers through their Gold Loan Account opened at the bank. Short-term bank deposits will attract applicable Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). However, the stock of gold held by the banks will count towards the general SLR requirement. 

Sovereign Gold Bonds will enable investors to buy gold certificates from the government which can later be converted to money or physical gold. As per proposal, gold bonds will be issued in denominations of 5, 10, 50 and 100 gms of gold and duration of such gold bonds will be for minimum 5 to 7 years. 

Banks will also benefit from these two schemes in the following manner: Banks are required to maintain Cash Reserve Ratio and Statutory Liquidity Ratio which are currently at 4% and 21.5% of their deposit with RBI. This money can be used for creating further credit, as bank may use mobilized gold as part of CRR/SLR requirements. 

Banks may also sell the gold deposits to generate foreign currency which can be used for lending to importers and exporters. The aforesaid two schemes are expected to be a major success, as vibrant young Indians understand that it is in both their personal and the country’s interest to go for paper gold instead of physical gold. However, with tax incentives  and  higher  interest rate  offering on sovereign gold bond, the schemes may become attractive for older generation as well, who have been investing in physical gold.

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